For VAT invoiced to customers that haven't been paid within six months of the payment due date, a business may be eligible for bad debt relief (BDR).
If you have not paid the VAT owing on a return or are utilising cash accounting, you are not eligible to submit a BDR claim since you must have paid the VAT over to HMRC.
If the debt has been written off in your accounts and it has been six months after the payment was due or, if later, the date of the supply of goods or services, relief for bad debts may be requested.
If you want to submit a claim for a refund, you should put the amount of VAT you're claiming in Box 4 of your VAT return, which covers the date you meet the requirements to do so, rather than taking it out of Box 1.
The debt must have been written off in your regular VAT accounts and moved to a different bad debt account.
Bad debt account
A company is required to set up a "refunds for bad debts" account. The BDR Account simply records debts that are late for payment by six months or more and is for VAT purposes only; it is not a component of the statutory accounts and does not imply that the bad debt has been written off. The BDR Account is frequently maintained separately from the primary VAT records.
Flat Rate Scheme
If you use the Flat Rate Scheme (FRS) for small businesses, you can also make a BDR claim. The compensation is not, however, claimed at your flat rate percentage. Instead, you submit a claim for relief for the higher amount of VAT that you actually charged on your invoice.
HMRC says this is because 'the flat rate includes an allowance for input tax which only occurs if you have been paid by your customer. As you will not have been paid, you will not have had full credit for any input tax.'
It would be logical to assume that BDR would automatically be accounted for because if you haven't been paid, you haven't paid HMRC the VAT at the flat rate percentage. The cash basis of the FRS is similar to cash accounting and the scheme percentage only has to be accounted for to HMRC when the customers pays.